Big Decision Looms on Fannie, Freddie (FNM; FRE)

The U.S. Treasury faces a decision by year end on whether to increase its bailout of Fannie Mae and Freddie Mac beyond the $400 billion it has already committed.

So far, the companies have taken $112 billion in capital infusions from the government, and most analysts believe they are unlikely to use up the full $400 billion.

But some analysts say the Treasury and regulators should take precautions, in case losses run higher than expected. After Dec. 31, the U.S. government would have to seek congressional approval for any increase. Until then, it can increase its commitment unilaterally.

The politics of any decision are thorny. If the Treasury doesn't increase the reserves now but needs to do so next year, it would have to appeal to a bailout-weary Congress in an election year. But upping its reserves now could remind taxpayers they still bear significant risk for the government's rescue of the financial system.

If the companies were to exhaust their reserves and Congress didn't authorize an increase, Fannie and Freddie would be placed in receivership, a form of bankruptcy restructuring.

"The fact is, this is a free option for them," said Rajiv Setia, an analyst at Barclays Capital. "Why involve Congress in it when the politics are obviously going to be more difficult?">>>MORE